Mortgage Interest Rate Tiers

Latest News Jordan Thomson 22 Nov

Since we know that lenders can back-end insure our mortgages and that this specifically makes these mortgage investments more attractive to investors, what does this mean for borrowers like you and me?

To summarize, any mortgage that is inexpensive for a wholesale lender to get financing for, allows the lender to pass on savings to their clients, meaning mortgages that are insured get the best rates! An insured mortgage is where a borrower pays the mortgage default insurance because they have less than 20% down payment and is required on all mortgages where the down payment is less than 20%.

But, lenders can also pay for insurance for their client! An “insurable” mortgage is one where the clients puts 20% down (or more), and their mortgage is approved as though a client is paying for insurance, but the actual insurance is paid for by the lender.

Rates for insurable mortgages are generally very similar to insured mortgages.

An “uninsurable” mortgage on the other hand is one where mortgage insurance is not available.

The graph below outlines what type of mortgages are insured, insurable or uninsurable.

So what does this all mean for you, the borrower?

If your mortgage is insurable, you may be able to get the best rates. What is interesting to note is that if you have a mortgage that was previously uninsured, your current lender cannot insure your mortgage but your mortgage may be insurable if you transfer to a new lender – this is where your opportunity lies!

Also, if your mortgage was previously “insured,” and you paid for mortgage insurance, you will also be offered the best rates upon transfer or renewal.

So whatever your mortgage or financing needs, give me a call at 604.725.1607. I’m always here to help!

Waiting for a Rate Drop?

Latest News Jordan Thomson 22 Nov

So are a lot of other people.

So far, all we’ve gotten is a dozen large or mid-sized lenders hiking 5-year fixed rates over the past week or so.

Meanwhile, the 5-year swap yield (one of the best leading indicators for fixed mortgage rates) is back down to levels it saw six months ago.

5-year-Swap

Back then (in May), the best 5-year fixed rates at big banks were roughly 3.44%-3.49%.

Today we’re at 3.69%, give or take, despite yields having dropped almost 20 basis points in the last 10 days.

No Rush to Discount

Big banks, which directly or indirectly control over $4 out of $5 mortgage dollars in this country, are in no hurry to chop rates and match falling yields. (Falling yields generally lower their funding costs.)

They’ve watched their mortgage growth get pummelled to levels we haven’t seen since last century. They’ve also witnessed a whole new level of competition this year for deposits and mortgages. That’s pressured net interest margins in the worst way.

The biggest problem is that the pool of prime borrowers has shrunk like wool socks in a clothes dryer. That’s mainly courtesy of stricter mortgage rules and higher rates.

These changes have driven competitors to cut insured/insurable mortgage margins to the bone to keep their pipelines full. Banks, which fund many of these competitors, seem to be onto them. What we’re hearing is that banks are being somewhat less generous on fixed rate pricing for the non-bank companies they buy mortgages from.

On top of this, banks are also keeping their own discretionary bank rates elevated. Aren’t oligopolies grand?

None of this is astonishing. After all, we are in the first quarter. Q1 is a notoriously weak time for mortgage discounts as the banks keep their powder dry for the active spring mortgage market.

There’s also the never-ending headline-driven worry about the credit cycle deteriorating. If/when that happens, bank losses will tick higher. And banks being the shrewd operators they are often price for such possibilities ahead of time.

Summing it all up, mortgage rates will follow if yields drop further. But don’t expect the juicy fixed-rate discounts we saw earlier in the year—not until the banks recoup some of their spread.

via Rate Spy

How to Get a Free Copy of Your Credit Bureau

Mortgage Tips Jordan Thomson 8 Nov

Think of your credit score as a report card on how you’ve handled your finances in the past. A credit score is a number that lenders use to determine the risk of lending money to a given borrower.

There is always someone willing to lend you money however, higher risk = higher rates!

Step 1 for good credit – you need to know your credit history
• In Canada there are 2 credit bureaus – Equifax and TransUnion.
• You can receive a FREE copy of your credit report from both Equifax Canada and TransUnion Canada once a year
• You can pay Equifax or TransUnion for a digital copy, which is much faster, BUT you have to pay, which sucks.

I recommend you order a copy of your credit report from both Equifax Canada and TransUnion Canada, since each credit bureau may have different information about how you have used credit in the past.

Ordering your own credit report has no effect on your credit score.
• Equifax Canada refers to your credit report as “credit file disclosure”.
• TransUnion Canada refers to your credit report as “consumer disclosure”.

Once you have obtained your free credit report, check it for errors:
• Are there any late payments that have been erroneously attributed to your credit history?
• Are the amounts owing in your credit report accurate?
• Is there anything missing on your credit bureau
o Sometimes the credit bureau has more that one file with your name, which can be merged, but it takes time.

If you find any errors on your credit report, you need to dispute them with your credit bureau.

How can I get a copy of my credit report and credit score?

There are two national credit bureaus in Canada: Equifax Canada and TransUnion Canada. You should check with both bureaus.

Credit scores run from 300 to 900. The higher the number, the greater the likelihood a request for credit will be approved.

The “free-report-by-mail” links are not prominently displayed, since credit bureaus would love to sell you instant access to your report and credit score online.

Equifax, the instructions to get a free credit report by mail are available here.

For TransUnion, the instructions to get a free credit report by mail are available here.

The bottom line: when it comes to financing your life, through credit cards, mortgages, car loans or any other kind of debt – your credit score has a BIG impact on what kind of terms you can negotiate.

Keeping an eye on your credit score is important — if there’s a problem or an error, you want to know and have time to fix it before you apply for a loan. If you have any questions, please feel free to give me a call at 604.725.1607 or email jordan@citywidemortgage.ca.

Thanks to DLC’s Kelly Hudson.

Should You Be Paying Your Mortgage Down Aggressively

Mortgage Tips Jordan Thomson 6 Nov

Last year a third of mortgage holders in Canada chose to pay their mortgages aggressively, which is to say they paid more than the amount required. And the numbers were higher for those who bought their properties after 2013.

Instinctively it would make sense to pay off your mortgage as quickly as you can, to reduce your debt and to build up more equity in your home in case you wanted to borrow against it.

But this isn’t always the case.

When does paying your mortgage aggressively make sense?

Canwise Financial President James Laird identified three kinds of people for whom an aggressive payment plan would be prudent.

The first are people who have mortgages with a high interest rate, since any additional payments (also known as prepayments) go towards reducing the principal. This will lower payments faster and puts you in a better negotiating position when the time comes to refinance.

The second kind are people with access to a Home Equity Line of Credit (HELOC), which can be used as their emergency fund. In that case, the money you’d otherwise put away for unexpected purchases might as well go towards your mortgage.

The third group are people uncomfortable with other investment vehicles like stocks and bonds. The big positive to paying a mortgage down aggressively is that it entails zero risk. And it’s better than letting the money sit under the mattress.

Renee Dadswell, Mortgage Trainer at Mortgage Professionals Canada and a mortgage agent at The Mortgage Station, added one more category of people well-suited to aggressively paying down their mortgage: those with refinanced mortgages where the money was used to purchase items with a shorter lifespan, like a car. “You don’t want to be paying for the car 15 or 20 years later when you don’t even own it anymore,” says Dadswell.

When does paying your mortgage aggressively not make sense?

“If you have a super low rate, don’t rush to pay it back,” Laird recommends. “It’s cheap money. Take advantage of it.”

Another instance where paying a mortgage down aggressively would be unwise is when the property in question is a rental property or houses a home-based business. “A portion of the interest (on rental properties and homes with home offices) are tax deductible,” says Dadswell. “In these cases, aggressive payback could have very negative tax effects.”

A third argument against an aggressive mortgage payback plan is if you can find another investment that gives you a better return. “If you put $100,000 into your 3.00% mortgage, you save $3,000 next year,” says Laird. “If you made a 5% return on that $100K instead, you could put that $3K towards your mortgage next year and still have $2K left over.”

How could you pay your mortgage more aggressively?

Like with anything else, how your money goes out should be a function of how it comes in.

If you’re a salaried employee and just got a significant pay raise, you could choose to increase your regular payments and direct that extra money towards the principal.

If your extra money comes to you as a year-end bonus or an owner’s dividend, you could choose to make a yearly lump-sum payment towards the principal.

Note that many full-featured mortgages come with flexible prepayment options that allow the borrower to increase their monthly payments by up to 100%, and allow for annual lump sum payments of up to 25% (though typically between 10-20%).

Either way, Dadswell offers this word of caution: “The goal of living in a house is to enjoy it and make memories in this home. If your budget is so tight that you cannot enjoy the house as a home, you will regret the purchase,” she said.

“A mortgage will most likely be your largest debt,” says Laird. “The payment schedule will inform the rest of your financial life, from your monthly budget to RRSP/RESP planning to how much you can save.”

Both Laird and Dadswell agree that a consultation with a mortgage broker and your financial planner should happen before putting an aggressive mortgage payback plan in place.

“You’ll get the right perspective on your goals and how putting more towards your mortgage will impact those goals,” says Laird.

And when you’re contemplating having less money in your pocket at the end of the month or year, the right perspective is a good thing.

Canadian Mortgage Trends

Bank of Canada Raises Rates to 10 year high

Latest News Jordan Thomson 6 Nov

The Bank of Canada today delivered a widely expected quarter-point increase to the overnight target rate, raising borrowing costs for millions of Canadians.

Citing an economy that is operating “at capacity” and modest wage growth, the BoC noted in its statement that the “policy interest rate will need to rise to a neutral stance to achieve the inflation target.” That neutral range, it says, is between 2.50% and 3.50%, suggesting additional rate increases of 75-100 bps.

Removed from previous statements was the word “gradual” concerning future rate increases. The BoC said the pace of those hikes will depend on “how the economy is adjusting to higher interest rates, given the elevated level of household debt,” as well as global trade policy developments.

James Laird, co-founder of RateHub and President of CanWise Financial, said the BoC’s statement is a clear signal that additional rate hikes may come faster than expected.

“They haven’t been this explicit in the past one-and-a-half years, even though they moved the rate up five times,” he told CMT. “They are sending a strong signal that rates will continue to move up at a quick pace.”

Benjamin Reitzes of BMO Capital Markets wrote in a research note that “there’s clearly an appetite for a few more hikes from the Bank. BMO’s forecast for hikes in January, April and July is looking pretty good right now.”

What it means for mortgage holders

Hours after the BoC’s announcement, most of the country’s big banks raised their respective prime rates, which brings the country’s prime rate to 3.95%—a 125-bps increase since last summer.

Most adjustable-rate mortgage (ARM) holders and those with lines of credit will see their payments increase as of their next payment date. ARM mortgage holders can expect monthly payments to rise about $12 per $100,000 worth of mortgage.

Variable-rate holders won’t see their payments increase, but they will see the interest portion of their payments jump while their principal portion declines.

The average 5-year variable insured rate available from brokers, as tracked by Mortgage Dashboard, is now 2.88%, up from 2.31% a year ago.

That’s still a sizable discount off 5-year fixed rates, which have risen to an average of 3.43%, up from 2.95% a year ago thanks to the 5-year bond yield (which leads fixed mortgage rates) reaching a seven-year high.

With the current spread between fixed and variable rates, many mortgage shoppers are likely to find themselves asking the perennial question: do I go fixed or variable?

Laird says that in a rising rate environment consumers tend to gravitate towards the security of fixed rates.

“But anyone who plans to pay down their mortgage rapidly can still consider a variable rate mortgage,” he notes. “Even in a rising rate environment the variable is the better choice for those who will aggressively pay down their mortgage. For those who want certainty in their mortgage rate, a longer-term fixed (7- or 10-year) should be considered.”

Rob McLister, founder of RateSpy.com, says historical data doesn’t support ultra-long terms, like 10-year mortgages. But he agrees that variable rates can still be a good bet for new mortgages, if the borrower is financially stable and the rate discount is big enough. “A rate of prime – 1.00%, for example, changes your probability of success dramatically versus prime – 0.60%,” he said.

Over the long term, research shows “variable-rate mortgages win, and the higher rates go, the more they win,” he told BNN today. Still, he cautioned this isn’t always the case.

“Interestingly, in summer 2017 if you would have gotten a bargain 5-year fixed rate mortgage, you’d be way ahead of the game compared to a typical variable-rate mortgage holder today,” based on interest cost alone and assuming no changes to the mortgage since origination.

As for fixed rates, McLister says the hottest deals are in the insured market. That’s a boon for clients with less than a 20 percent down payment, or an already-insured switch. Insured rates remain as much as 35 basis points below the best uninsured rates, depending on the term.

Canadians Becoming Anxious

The five rate increases over the last 15 months, and the prospect of more to come, have more than half of Canadians concerned about managing their debt costs, according to a recent poll from debt consultancy firm MNP. More troubling was a 6% increase since June in the number of Canadians worried that higher interest rates may push them towards bankruptcy (33%).

This coincides with a CBC poll of 1,000 Canadian homeowners this month that found almost three quarters of those with debt on their home—primarily mortgages—say they’re worried about rate hikes.

“It’s now been a year since the first interest rate increase in nearly a decade,” said Grant Bazian, president of MNP’s personal insolvency practice. “As the effects have had time to soak in, more people are feeling the pinch. Of particular concern is there’s an entire generation of Canadians who never experienced a higher rate environment.”